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China has a lot going for it, from its cheap stocks to its recovering economy. And today, investors got good news regarding inflation.

Associated Press

It’s still not a buy, JPMorgan says. Its strategists explain:

Despite cheap valuations and a gradually recovering economy, we see limited top-down reasons for optimism on China shares. Policy is focused on driving sustainable growth, requiring a slower growth trajectory, which sits uncomfortably with wide-ranging overcapacity issues. As a result, while valuations and gradual recovery may limit downside, this appears inadequate to drive upside optimism.

The note reiterates JPmorgan’s call from last month, when it said “index performance is likely to drift downwards, both in absolute and relative terms, despite cheap headline valuations.”

They do have advice for investors sticking with China: Focus on defensive sectors and bottom-up stock picking. Their favorite industries include consumer electronics, healthcare and pollution plays, while top stocks include China Unicom (762.HK), Tencent (700.HK) and Sinopec (386.HK).

China ETFs are having a good day, however. The iShares FTSE China 25 Index (FXI) has gained 2% to $36.34, the iShares MSCI China Index ETF (MCHI) has jumped 1.7% to $44.61 and the Market Vectors China ETF (PEK), which tracks shares available primarily to Chinese citizens, has risen 1.5% to $33.98.

While gold these days is primarily the realm of conspiracy theorists and hedge-fund traders in developed markets, emerging markets are embracing the precious metal. Skene notes that Turkey ranks second after India in gold ownership per capita, and that Turkish citizens can deposit gold in banks and withdraw cash or borrow against it. He also points out that Kuwait Finance House has ATM machines that let clients withdraw gold coins, something unimaginable in the U.S.

That’s a very different mentality than in the U.S., where many investors sill prefer exchange-traded funds like SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). Still, that’s a long way from backing a currency with gold. Yet some central banks may be further along than many investors think. Skene notes:

Turkey’s banks now have over 300 tonnes of gold in their reserves plus the 370 tonnes in official foreign exchange reserves. Rising privately owned gold deposits are coinciding with a rising lira, falling interest rates, shrinking current account deficits and higher credit ratings on government bonds. The central bank recently cut interest rates and raised gold and cash reserve ratios to prevent inflows of foreign deposits from 1) pushing the lira too high and 2) raising the rate of domestic credit growth – a more sophisticated monetary policy than the financial repression in developed nations.

Monetising gold has benefitted Turkey greatly and a gold backed lira, a possible next step, would significantly lower its cost of capital.

Other developing nations with large gold holdings include China, Russia and Iran, Skene says. And even if they don’t go so far as to back their currencies with gold, they’re still in a far better position than western counterparts. If the crisis in the developed world continues–as Skene believes it will–developed world investors should look to emerging markets for their fixed income needs. He writes:

Monetising gold could help developed nations avoid the looming abyss (like Turkey), but is very unlikely as central bankers apparently will remain heroes until the European liquidity crisis hits. By contrast, improving creditworthiness and higher yields for equal credit risk in emerging nations are attracting fixed income investors. However, marketability and volatility risks are higher in emerging markets and spreads have fallen too far. Accelerating deterioration in European bank credit has begun to widen spreads. Long-only investors should move fixed income allocations to emerging nations as the crisis progresses.

He also recommends investors buy gold, which might be at a seasonal low, and that hedge funds should buy gold and sell U.S. stocks.

More people are visiting Macau so far this year, according to RBC’sJohn Kempf. He writes:

Bloomberg News

Statistics released today by the Macau Statistics and Census Bureau showed total visitation to Macau increased 11.5% Y/Y in February, to 2,376,840. The increase was primarily from Mainland China (+17.4% Y/Y) and Hong Kong (+15.8% Y/Y) as a result of Chinese New Year. On a YTD basis, which adjusts for the timing of Chinese New Year (January last year vs. February this year), visitation to Macau has increased 2.1% Y/Y.

Macau’s gaming stocks are thriving, in part, because they’ve managed to tap the so-called mass gambler, even as China has crackdown on corruption and consumption among its VIPs. The same can’t be said for hotel chain Shangri-La Asia (69.Hong Kong), which UBS cut to sell from neutral today. UBS analysts Anthony Wong and Grant Chum write:

Shangri-La has suffered from China’s curb on ‘extravagances’ amidst the change of govt leadership. Management commented that China RevPar was -11% and F&B business was -18% yoy in Jan-Feb 2013. We estimate there is 5%/17% downside to our FY13E EBITDA/EPS if China RevPar stays flat yoy vs. our forecast of 6% growth. We note RevPar growth was slightly negative in local currency for FY2012, highlighting the issue of over-supply that is likely to persist.

Yum (YUM) reported same-store sales last night and the best that can be said is that the news out of China is a lot less bad than expected. A lot of bad news had been priced into the stock, so it’s not surprising to see Yum’s shares jump out of the gate.

APASSOCIATED PRESS

BloombergBusinessweek has the details:

The owner of KFC, Pizza Hut and Taco Bell said late Monday that its sales at China stores open at least a year dropped 20 percent for that two-month period, less than the 25 percent decrease it had projected.

Yum’s China sales rose 2 percent overall for the month of February, helped by the timing of Chinese New Year. But the timing of the holiday hurt the company’s January sales, ultimately having a neutral effect.

Analyst opinion is all over the place. Over at Oppenheimer, analysts Brian Bittner and Michael Tamas, the most positive of the bunch, write:

While still a “prove it” story, Feb. China comps represent a clear improvement from
Jan. as chicken meat issues have begun to abate. Combination of improving “core”
trends and easing comparisons drives our EPS estimates higher. While business
remains down year-over-year, visibility into YUM’s ability to drive positive comps by
4Q13 is stronger and a rebound year in ’14 is highly probable, in our view. Margins do
remain a question mark in the equation. We raise our price target to $77 and maintain
Outperform rating.

BofA Merrill Lynch’s analysts, who rate the stock a buy, note that the “new is good only versus expectations…” They write:

Yum reported that China same store sales for 1Q (the two month period of January-February for China) declined 20% with KFC down 24% and Pizza Hut (PH) down 2%. It seems strange to describe such sales weakness as a positive versus expectations but that is the case as Yum had guided in early February for 1Q China comps to be down 25%.

They raised their price target to $80, from $70, after restoring their pre-chicken-problem multiple of 30x to Yum’s China business.

Susquehanna’sRachael Rothman, like Merrill Lynch, increased the multiple she applies to Yum’s China earnings, as same store sales seem to be improving faster than many expected. But she upped hers to 20x from 19x, and increased her target from $62 to $67.

Raymond James’ Bryan Elliott, who rates the stock an underperform, worries about the costs involved in restoring sales in China. He writes:

Management provided no disclosure on the extra costs of advertising, discounts, or other actions that have recently been undertaken to try to help sales recover. Barring additional disclosures in the interim, this will keep EPS visibility well below average until EPS is released on April 23. That makes it difficult to judge the EPS impact of the modest reduction in the rate of the sales decline for February – if the improvement was “purchased” through aggressive pricing and promotions EPS could still disappoint…

YUM jumped almost 7% after hours to over $72 – a level that if sustained would put YUM back to a record high EV/EBITDA multiple on forward 12 month EBITDA. We believe the after-hours jump was mainly short covering, and would not expect it to be sustained.

AllianceBernstein’s Sara Senatore, meanwhile, notes that with “the stock up after hours, the current price already appears to discount a return to trend growth by F14…” As a result, “the risk-reward does not look favorable at these levels,” she says.

Yum has gained has gained 2.1% this morning to $69.29 at 10:18 a.m., trumping the 0.3% loss at McDonald’s (MCD), which announced China sales on Mar. 8, 0.3% loss and the S&P 500′s 0.2% loss.

Yesterday, shares of Sohu.com (SOHU) surged 12% on speculation that its management was in talks with investment banks and private-equity firms about taking the company private. It also sent shares of gaming-site Changyou.com (CYOU), of which it owns a 66% stake, up 12%.

REUTERS

Sohu has issued a press release denying the speculation:

The Company announced that, contrary to the assertions in the article, it is not talking to investment banks and private equity funds about a possible plan to take the company private and/or delist its common stock from the NASDAQ Global Select Market. “No such discussions are in progress or currently contemplated,” confirmed Ms. Carol Yu, Co-President and Chief Financial Officer of Sohu.

Shares of Sohu have plunged 7.9% to $45.00 this morning, while Changyou has dropped 7.6% to 29.80.

Still, it’s not hard to see why such speculation could be taken seriously. In a note issued today, Oppenheimer’s Andy Yeung and Gloria Yu explain why. They write:

Our analysis suggests that SOHU’s non-gaming operations are steeply discounted by the market. At its current stock price, Sohu has a market capitalization of $1.88B including its 66% stake in CYOU, implying its portal (Sohu.com), online video (Sohu Video), search engine (Sogou) and wireless VAS businesses have a combined enterprise value of only $321M.

They also note that there’s been an increase in the number of U.S.-listed Chinese companies going private. 25 companies announced they would delist in 2012, up from 16 in 2011 and six in 2010. Nearly 50% have been completed.

Yeung and Yu also provide a handy list of companies that could be on the receiving end of management-buyout rumors. They include Shanda Games (GAME), Perfect World (PWRD) and ChinaCache International Holdings (CCIH).

Shanda has gained 1.7% to $3.00 this morning, Perfect World has ticked up 0.45% to $11.16 and ChinaCache has gained 0.55% to $3.65.

Emerging markets have rallied during the past three months–but investors should be worried about future gains, according to Ned Davis Research. That’s because emerging-markets have been led high higher by the financial sector, and these types of rallies don’t typically end well.

Reuters

During the past three months, the MSCI Emerging Markets Index has gained 7.8%–but the big winner has been emerging market financials. The MSCI Emerging Market Financials Index has gained 13.9% during the past three months, more than five percentage point more than 8.2% return from the second-best performing sector, the MSCI Emerging Market Industrial Index.

Emerging Markets, however, haven’t performed very well during the following year when financials lead the way, according to Ned Davis Research’s Tony Welch. When the 63-day relative strength of emerging-market financials is positive, emerging markets have gained 0.9% during the next 12 months. When the same measure is negative, emerging markets have gained 15.9%.

In fact, only strength in the healthcare sector has presaged worse EM performance–the broad index typically loses 1.6 percent when the 63-day relative strength is positive and gains 20.4% when it’s negative.

Yet, based on valuations, the rally in financials doesn’t seem overdone, Welch says. He writes:

The sector is relatively cheap based on earnings yield, dividend yield, and book yield. And while yields tell a portion of the story, the earnings picture remains positive as well. Earnings grew over 7% last year and are forecast to grow about the same this year. The strong earnings picture has helped to contribute to a relatively high return on equity and internal growth rate. In fact, compared with developed markets, emerging market Financials are relatively inexpensive based on earnings and have delivered much stronger earnings growth with higher profitability (ROE) and efficiency (internal growth rate).

That could mean some financials are still a buy, despite recent gains. India’s ICICI Bank (IBN) has dropped 2.4% today, after reporting earnings of 22.5 billion rupees today, above analyst expectations for 20.89 billion rupees., but returned 17% during the past three months. Brazil’s Banco Bradesco (BBD), meanwhile, has gained17.1% during the past three months, while Itau Unibanco (ITUB) has gained 18.4%.

The iShares MSCI Emerging Markets Financial Sector Index (EMFN) exchange-traded fund has gained 18.7% during the past three months, while the EGShares Financials GEMS ETF (FGEM) has returned 15.8%.

Shares of the Chinese internet upstart have dropped 3% today to $26.28, and, as is often the case when Qihoo’s shares are in play, there’s no obvious news on the company. The closest thing I’ve found is an Investor’s Business Dailystory that screens for the stocks with the best fundamentals–a list that includes not only Qihoo but LinkedIn (LNKD), Air Lease (AL), HollyFrontier (HFC) and IPG Photronics (IPGP).

By fundamentals, IBD means fastest growing–they screened for the stocks that have grown earnings and revenues by 25% during the past three years, and pulled the ones from the top of the list. Their argument: “Those at the top of the list do better. Far better.”

At least in hindsight they do. Of the five, all but Air Lease have returned more than 70% this year (poor Air Lease has dropped 10%).

But couldn’t these stocks just be “lottery tickets?” You know, they move quickly, promise riches beyond your wildest dreams–and usually end in disappointment.

Here’s a screen of my own. I searched for the stocks in the the S&P Smallcap 600 and S&P Midcap 400 that gained more than 50% last year and then looked at their performance in 2012. In 2011, the top-five averaged gains of 147%; in 2012 they’ve averaged 12%, less than the 18% average for the entire group this year.

What does this have to do with Qihoo? Probably nothing. Just keep it in mind as you chase the thing.

Its economy is chugging along and there’s little inflation in sight. Its central bankers project an inflation rate between 3.1% and 3.9% in 2013 and said there was no need for monetary policy to support the economy. And the decision to stay put will allow it to act if prices do rise or the economy starts to falter.

The Philippines Stock Exchange PSEi stock index fell 0.55% today, but Philippine stocks have been among the best performing emerging markets in 2012. The MSCI Philippines stock index has gained 34% this year, third best among emerging markets, and the iShares MSCI Philippines Investable Market Index (EPHE) exchange-traded fund has returned 47% to U.S. investors thanks to the strong Philippine peso.

The strong economic data and benign inflation environment should support higher markets into the New Year. The biggest risk–aside from mass selling driven by the fiscal cliff–could be China’s resurgence. If the economic revival of the world’s second largest economy is real, that could benefit the markets of northern Asian countries versus southern ones like the Philippines, Vietnam and Thailand.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.